Starboard Urges Yahoo (YHOO) CEO Mayer to Buy AOL

Shares of Yahoo (YHOO) jumped more than 4% Friday after activist investor Starboard Value LP sent an open letter to Yahoo CEO Marissa Mayer urging her to cut costs, halt acquisitions, and consider a strategic combination with AOL Inc (AOL).

In the letter, the New York-based shareholder, which says it has acquired a significant stake in the web portal, claims that a deal between the two companies would deliver cost synergies of up to $1 billion by reducing cost overlaps in their display ad business.

“[W]e believe a merger of AOL and Yahoo’s core business may be one of the best ways to both fully seize the cost reduction opportunity and also to tax efficiently monetize Yahoo’s non-core equity holdings,” the letter signed by Starboard CEO Jeffrey Smith said. The letter also mentions the fact that the Sunnyvale, California-based search giant is currently “deeply undervalued relative to the sum of its parts.”

Wallstreetpit has reached out to Yahoo for comment on the letter and will update this post with any additional information we learn.

Yahoo shares were up $1.79, or 4.57%, to $40.73 at midday trading. Approximately 41,229,301 shares have already changed hands, compared to the stock’s average daily volume of 30,518,300. AOL increased $1.34, or 3.10%, to $44.30. Ticker is trading at unusually high volume with 5.7M shares changing hands. It is currently at more than 5x its average daily volume.

Update: Marissa Mayer responded to Starboard’s letter saying that Yahoo is committed to “acting in the best interests of the company and all of its shareholders”. She also said that the search giant will review Starboard’s letter and looks forward to discussing the matter.

“We will continue to focus on evaluating various capital allocation initiatives, an update to which we plan to provide on our third-quarter earnings call,” Mayer said in a statement issued after market close.